Risks rise as hedge funds place record bet on oil

LONDON: Hedge funds increased their net long positions in Brent and WTI derivatives by 7 million barrels to a record 663 million barrels in the week ending April 26.

Even though oil prices have already risen by roughly $20 per barrel (70 percent) from their low in January, hedge funds are more bullish than at any time since oil prices started slumping in the summer of 2014.

Hedge funds and other money managers held futures and options contracts equivalent to 791 million barrels of crude betting on a further rise in prices and just 128 million barrels gambling on a fall.

The record net long position in crude easily surpasses previous peaks set in May 2015 (572 million barrels) and June 2014 as ISIS fighters threatened the oilfields of Iraq (626 million barrels).

Large concentrations of long or short positions are often followed by a sharp reversal in prices when holders try to lock in their profits by liquidating some of their positions, triggering a rush for the exit.

The accumulation of such a large net long position over the last 17 weeks could indicate an increasing risk crude prices will pull back and give up at least some of their recent gains in the short term.

Crude prices have been closely correlated with the accumulation and liquidation of hedge fund positions in Brent and especially WTI since the start of 2015 (tmsnrt.rs/1SKnhyS).

Traders and analysts are divided over whether hedge funds and other money managers are now fully invested in crude, heightening the risk of reversal, or could still increase their position further.

Since the start of the year, hedge funds have added almost 195 million barrels of additional long positions in Brent and WTI, while cutting short positions by 235 million.

The brutal squeeze on former hedge fund short positions has been at least as important as the emergence of fresh long positions in pushing prices higher.

But with hedge fund short positions down from a recent peak of 392 million barrels in the second week of January to just 128 million barrels there are not many more short positions to squeeze.

On the longer side, hedge funds have already amassed a record number of contracts. Past experience indicates that this could be a close to their maximum position.